Claims handling as a financial service: ASIC seeks and obtains penalties against insurer for breach of its claims handling obligations
In the recent decision of Australian Securities and Investments Commission v MLC Limited  FCA 539 the Federal Court of Australia imposed a significant financial penalty against a life insurer for breaches of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Corporations Act 2001 (Cth) arising from failures in its claims handling processes and procedures and in its systems for review and staff training. The insurer has also been ordered to publish an adverse publicity notice on its website.
The decision provides guidance to insurers on the claims handling standards that are now required to be met to meet the obligation to handle claims efficiently, honestly and fairly under its Australian Financial Services Licence (AFSL) and the Corporations Act, consistent with claims handling now being regulated under Chapter 7 of the Corporations Act as a financial service. The key areas of focus in this case were failing to pay customers their entitlements under the insurance policies and representing that cover was not available when in fact it was, failing to review and update medical definitions despite receiving certain medical evidence and opinion, and failing to monitor and train staff in respect of customer communications.
We explore the decision in more detail below.
On 18 November 2021, ASIC commenced proceedings against MLC Limited (MLCL) in the Federal Court alleging that MLCL:
- failed to provide payment to 119 eligible customers for rehabilitation treatments as part of their income protection policies due to inadequate processes and procedures in place; and
- lacked adequate systems for review and staff training which meant that claims were declined due to MLCL’s outdated medical definitions for critical illnesses, and customers not receiving communication relating to their insurance policies.
ASIC claimed that by reason of this conduct, MLCL:
- made false or misleading representations and engaged in misleading or deceptive conduct in breach of sections 12DB and 12DA of ASIC Act and section 1014H of the Corporations Act;
- breached its duty of utmost good faith in contravention of section 13 of the Insurance Contracts Act 1984 (Cth) (ICA); and
- failed to do all things necessary to ensure that the financial services covered by its AFSL were provided efficiently, honestly and fairly, in contravention of section 912A(1)(a) of the Corporations Act.
Following a mediation, the parties reached an agreed position in relation to proposed declarations and orders, including a $10m pecuniary penalty. On 18 May 2023, Justice Moshinsky agreed to make the proposed declarations and orders.
In the judgment, Justice Moshinsky found that MLCL failed to provide rehabilitation bonus benefits (RBB) as part of its income protection cover, to 119 eligible customers (RBB Breach). The RBB terms provided that customers may be eligible to receive the RBB if they participated in an approved vocational rehabilitation program. The non-provision of these payments represented that the customers were not eligible for the RBB when they were in fact eligible. Accordingly, MLCL was found to have:
- made false or misleading representations, and engaged in misleading or deceptive conduct, in contravention of ss 12DB(1)(a), (e) and (i) and s 12 DA(1) of the ASIC Act, and s 1041H of the Corporations Act; and
- breached its duty of utmost good faith in contravention of s 13 of the ICA by failing to fulfil its obligations under the relevant insurance policies.
His Honour also found that MLCL failed to do all things necessary to ensure that the financial services covered by its AFSL were provided efficiently, honestly and fairly, in contravention of section 912A(1)(a) of the Corporations Act. That is because MCLC:
- did not have adequate processes to review and update medical definitions for critical illnesses, particularly severe rheumatoid arthritis (SRA) in its SRA Policies (SRA Breach); and
- failed to adequately train staff regarding the removal of a mail suppression (MS) flag and appropriately monitor staff use of the flag. This resulted in some customers not receiving communications from MLCL regarding their policies (MS Breach).
Accordingly, as jointly proposed by the parties, Justice Moshinsky ordered that MLCL:
- pay to the Commonwealth of Australia a $10m pecuniary penalty (in respect of the RBB Breach);
- pay ASIC’s costs of and incidental to the proceedings; and
- publish a written adverse publicity notice on its webpage for no less than 90 days.
The judgment provides helpful guidance on the way in which a Court will interpret an insurer’s obligation to handle claims efficiently, honestly and fairly under its AFSL, and the significant financial and reputational impacts that might arise in the event that an insurer is found to have breached those obligations.
In this case, the Court did not make any order for MLCL to pay a penalty under the ICA for the established breaches of the duty of utmost good faith. No such penalty was sought and it appears that the conduct constituting the relevant breaches occurred before the penalty under the ICA was in force in any event. The fact that ASIC sought declarations for breach of the claims handling obligations under the AFSL and Corporations Act, and for breach of the duty of utmost good faith under the ICA, may indicate that future action by AISC in this space may involve penalties sought under both the Corporations Act and the ICA.